The Reserve Bank of India (RBI) and the Finance Ministry are at loggerheads again on the issue of setting up an autonomous entity to manage the governments debt,estimated at Rs 18.44 lakh crore or almost 40 per cent of the GDP as on March 31,2008. At present,this function is managed by the RBI resulting in a conflict of interest situation where the central bank sets the short-term interest rate as a monetary authority and simultaneously sells government bonds as the countrys debt manager. Rakesh Mohan,Deputy Governor,RBI,who chairs a committee on financial sector assessment (FSA) constituted by the government and the central bank in September 2006,has firmly opposed the setting up of an independent Debt Management Office (DMO) outside the central banks purview. The FSA exercise,undertaken by India on its own for the first time based on a handbook prepared by the World Bank and the International Monetary Fund,is complete now and a comprehensive report on the stability and development of Indias financial sector will be published soon. According to government officials,confirmed separately by sources in the RBI,in the last and final meeting of the FSA committee,Rakesh Mohan pointed out that divesting the RBI of its debt management functions was not prudent at a time when the government is running a high fiscal deficit. His views are that of the RBI. But the co-chair of the committee,Economic Affairs Secretary Ashok Chawla and member Arvind Virmani,currently Chief Economic Advisor in the finance ministry,both strongly recommended the desirability of setting up an independent DMO. The Centres fiscal deficit,budgeted at 2.8 per cent of the gross domestic product in the beginning of 2008-09,is estimated to be around 7.9-8 per cent of the GDP,according to the Prime Ministers Economic Advisory Council. The RBI fears that political and government interference in the affairs of the DMO may cause irreparable damage,given the scale of its operations. Finance ministry officials,however,contend that there is no right time to do the right thing. In fact,tough choices should be made now,especially with the governments borrowing programme increasing,huge savings can be made on interest payments. The RBI has never really wanted to cede control. It is now citing high fiscal deficit as a reason, an official said. When contacted,Virmani said his views were clear right from the time he headed a panel way back in 2001 on the issue. The panel he chaired then had recommended setting up a middle office within the finance ministry to develop a risk management framework in the first stage and an autonomous DMO backed by statute in the second stage. The government had,in Budget 2007-08,announced its decision to set up an autonomous debt management office. But,with a reluctant RBI,it took a while 18 months or so before the finance ministry could even set up a middle office in its premises to initiate work on the Budget promise. It later set up an internal working group under Jahangir Aziz,former principal economic advisor,finance ministry that recommended setting up a National Treasury Management Agency to manage the government debt. Aziz,who is now Executive Director,JP Morgan Chase Bank,NA at its Mumbai branch,said,that Indias debt as a percentage of GDP has stabilized over the last 6-7 years. In Japan that has a DMO,the public debt-GDP ratio is much higher than Indias. High fiscal deficit and public debt cannot be reasons not to have a DMO, he said. According to Aziz,for the monetary policy to be more credible,it is important to remove fears in the market that monetary actions are taken to serve other interests. For instance,today the market is always guessing if a rate cut or a reduction in the cash reserve ratio is a signal of higher government borrowings, he said,adding that monetary action should not be influenced by the level of government borrowings.
